AUD/USD Hits 7000 As Carry Trade Comes Back

Last updated 3/23/2009 4:55 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Treasury Secretary Geithner to announce details of the toxic asset plan
• Adu-Dhabi takes 9% share of Daimler
• Equities up in Asia and Europe
• Oil above $50/bbl at $52
• Gold at $957/oz. as commodities firm

Overnight Eco

• JPY BSI Manufacturing Index much worse at -66 vs. 47.3
• EUR Trade Balance n/a

Event Risk on Tap

• CAD Leading Index expected at -0.9%
• USD Existing Home Sales expected at 4.45M

Price Action

• USD/JPY runs to 96.60 on carry demand
• AUD/USD hits 7000 as risk sentiment postive at start fo the week
• GBP/USD runs to 1.4600on anti-dollar flows
• EUR/USD takes out 1.3700 as doubts on Gethner plan persist

The start of the week revived the carry trade in the currency market with Aussie hitting the 70 cent mark for the first time since January 10th of this year as equity markets in Asia and Europe opened on a positive note. The stealth rally in commodities which saw oil prices hit $52/bbl in overnight trade while gold rose to $957/oz also helped contribute to AUD/USD strength.

As one of the last remaining yield currencies in the G10 universe the Aussie is catching a bid from investors looking for a modicum of short term returns in a ZIRP based world. However, the flow into the AUD/USD is based in the assumption that the RBA is finished with its monetary easing policy, a thesis that could prove decidedly false if global economic demand does not rebound by the middle of this year. For the time being, investor optimism is buoying the unit although the 7000 level will prove difficult to overcome is equity flows turn negative once again.

Meanwhile in US all focus will turn to Treasury Secretary Geithner who is expected to reveal the details of his new plan to remove toxic debt from the balance sheets of the banks. As we noted earlier, the leaked details so far raise more questions than answers as the proposal appears to be simply to be another variation of Secretary Paulson’s original ideas. We noted that, “at first glance the Gaithner plan appears to be simply a more convoluted variant of the Paulson plan which relies on the underlying and rather questionable assumption that the value of the toxic debt on the bank’s balance sheets is actually worth more than the current market price.”

The currency markets responded with their own note of skepticism, as the EUR/USD climbed above 1.3700 in early European trade. The markets will have a full reaction to the proposal after the 17:45 GMT press conference, but if FX traders perceive the latest scheme as simply another case of throwing good money after bad, the reaction is likely to be dollar negative as it will contribute to the already growing concerns over the dilutive direction of US monetary and fiscal policies.

How Will Aussie React to Geithner Plan?

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.